1 click to edit master title style 1 1 1 process cost systems 3
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Process Process Cost Cost
SystemsSystems
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1. Explain and illustrate the characteristics and cost flows for a process manufacturer.
2. Prepare a cost of production report accounting for completed units under the Fifo method.
After studying this chapter, you should be able to:
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3. Prepare journal entries for transactions of a process manufacturer.
4. Use cost of production reports for decision making.
5. Contrast just-in-time processing with conventional manufacturing practices.
After studying this chapter, you should be able to:
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Explain and illustrate the characteristics and cost flows for a process
manufacturer.
Objective 1Objective 1Objective 1Objective 1
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Both systems:
Comparing Job Order and Process Cost Systems
1. Accumulate product costs.
2. Categorize manufacturing costs into direct material, direct labor, and factory overhead.
3. Allocate costs to products.
(Continued)
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Both systems:
4. Maintain perpetual materials, work in process, and finished goods inventory records.
5. Use product cost data for decision making.
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Primary differences:
1. Manufacturing costs are accumulated to departments, rather than jobs.
2. Manufacturing costs are allocated to products based on units of production.
3. Manufacturing costs are accumulated and transferred between departments.
(Continued)
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Primary differences:
4. Work in process inventory consists of partially completed production within a department, rather than the sum of job cost sheets of partially completed jobs.
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9(Continued)
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Process cost systems are used to manufacture homogeneous products. Examples are:
Tennis balls Motor oil Candy bars Soft drinks
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In contrast, job cost systems are used to manufacture unique products or provide unique services. Examples are:
Custom-built homes Landscape design services Customer cabinets Airplanes (767)
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Example Exercise 3-1
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Which of the following industries would normally use job order costing systems and which would normally use process costing systems?
Home construction Computer chipsBeverages CookiesMilitary aircraft Video game design
and production
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For Practice: PE3-1A, PE3-1B
Follow My Example 3-1
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Home construction Job OrderBeverages ProcessMilitary aircraft Job OrderComputer chips ProcessCookies ProcessVideo game design and
production Job Order
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Materials WIP – Mixing
(a) Purchases DMDM
WIP – Packaging
DMDM (b) Direct Materials
Exhibit 3 Cost Flows for a Process Manufacturer
DMDMDMDM
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Materials WIP – Mixing
DMDM(a) Purchases
DMDM
DMDM
WIP – Packaging
(c) Direct Labor—Mixing
Exhibit 3 Cost Flows for a Process Manufacturer
DLDL
DMDM
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Materials WIP – Mixing
DMDM(a) Purchases DMDM
Factory OH – Packaging
WIP – Packaging
Exhibit 3 Cost Flows for a Process Manufacturer
DLDL
IMIM
(d) Factory overhead incurred
(d) Factory overhead incurred
Factory OH – Mixing
DMDM
IMIM (d) Indirect materials
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Exhibit 3 Cost Flows for a Process Manufacturer
Materials WIP – Mixing
DMDM(a) Purchases DMDM
Factory OH – Packaging
WIP – Packaging
DLDL
IMIM
Factory OH – Mixing
FOAFOA
FOAFOA
(e) Factory overhead applied—MixingFOAFOA
(d) Factory overhead incurred
(d) Factory overhead incurred
DMDM
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Exhibit 3 Cost Flows for a Process Manufacturer
Materials WIP – Mixing
DMDM(a) Purchases DMDM
Factory OH – Packaging
WIP – Packaging
DLDL
IMIM
Factory OH – Mixing
FOAFOA
FOAFOA
(d) Factory overhead incurred
(d) Factory overhead incurred
(f) Costs trans-ferred out
(f) Costs transferred inCTICTI
CTICTI
DMDM
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Exhibit 3 Cost Flows for a Process Manufacturer
Materials WIP – Mixing
DMDM(a) Purchases DMDM
Factory OH – Packaging
WIP – Packaging
DLDL
IMIM
Factory OH – Mixing
FOAFOA
FOAFOA
(d) Factory overhead incurred
(d) Factory overhead incurred
(f) Costs trans-ferred out
(g) Direct labor in Packaging
CTICTI
DLDL
DLDL
DMDM
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Exhibit 3 Cost Flows for a Process Manufacturer
Materials WIP – Mixing
DMDM(a) Purchases DMDM
Factory OH – Packaging
WIP – Packaging
DLDL
IMIM
Factory OH – Mixing
FOAFOA
FOAFOA
(d) Factory overhead incurred
(d) Factory overhead incurred
(f) Costs trans-ferred out
CTICTI
DLDL
DMDM
FOAFOA
(h) Factory overhead applied—PackagingFOAFOA
FOAFOA
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Exhibit 3 Cost Flows for a Process Manufacturer
Materials WIP – Mixing
DMDM(a) Purchases DMDM
Factory OH – Packaging
WIP – Packaging
DLDL
IMIM
Factory OH – Mixing
FOAFOA
FOAFOA
(d) Factory overhead incurred
(d) Factory overhead incurred
(f) Costs trans-ferred out
CTICTI
DLDL
DMDM
FOAFOA
(i) Costs trans-ferred out
Finished Goods
FOAFOA
(i) Cost transferred in from WIP—PackagingCTICTI
CTICTI
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Exhibit 3 Cost Flows for a Process Manufacturer
Materials WIP – Mixing
DMDM(a) Purchases DMDM
Factory OH – Packaging
WIP – Packaging
DLDL
IMIM
Factory OH – Mixing
FOAFOA
FOAFOA
(d) Factory overhead incurred
(d) Factory overhead incurred
(f) Costs trans-ferred out
CTICTI
DLDL
DMDM
FOAFOA
(i) Costs trans-ferred out
Finished Goods
FOAFOA
(j) Cost transferred to Cost of Goods SoldCGSCGS
CTICTI
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Cost of Goods Sold
CGSCGS
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Prepare a cost of production report accounting for completed
and partially completed units under the FIFO method.
Objective 2Objective 2Objective 2Objective 2
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Inventory in process, July 1, 5,000 gallonsDirect materials cost, 5,000 gallons $ 5,000Conversion costs, 5,000 gallons, 70% completed 1,225Total inventory in process, July 1 $ 6,225
Direct materials cost for July, 60,000 gallons $66,000Direct labor for July 10,500Factory overhead applied for July 7,275 83,775Total production costs to account for $90,000Goods 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 ?
3-2Mixing Department of Frozen Delight
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Step 1: Determine the Units to Be Assigned Costs
Total gallons charged to production:In process July 1 5,000 gallonsReceived from materials storage 60,000 gallonsTotal units accounted for by the
Mixing Department 65,000 gallons
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Total Units to Be Assigned Costs
A. Inventory in process, July 1, completed
in July5,000 gal.
B. Started and completed in July57,000 gal.
Transferred out to the Packaging
Department in July62,000 gal.
C. Inventory in process, July 31 3,000 gal.
Total gallons to be assigned costs65,000 gal.
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Example Exercise 3-2
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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 Blending 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?
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For Practice: PE3-2A, PE3-2B
Follow My Example 3-2
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54,000 liters started and completed (58,000 completed – 4,000 beginning work in process)
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Step 2: Calculate Equivalent Units of Production
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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.
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Frozen Delight’s Equivalent Units Computation for Materials in July
Percent Equivalent
Total Materials Units for
Whole Added DirectUnits 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 65,00060,000
Important: Note the word
“Added”
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Example Exercise 3-3
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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?
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For Practice: PE3-3A, PE3-3B
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Follow My Example 3-3
Inventory in process, beginning of period 4,000 0% 0
Started and completed during theperiod 54,000 100% 54,000
Transferred out of Bottling(completed) 58,000 54,000
Inventory in process, end of period 3,000 100% 3,000Total units to be assigned costs 61,000 57,000
PercentMaterials Equiva-
Whole Added lentUnits in July Units
Answer: 57,000 equivalent units
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Conversion Equivalent Units
The direct labor and applied factory overhead are often combined as conversion
costs because they are both usually incurred evenly throughout a process.
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PercentTotal Conversion EquivalentWhole Completed Units forUnits in July Conversion
Inventory in process, July 1(70% complete) 5,000
30% 1,500Started and completed in July
(62,000 – 5,000) 57,000100% 57,000
Transferred out to Packaging Dept. 62,000 —58,500
Inventory in process, July 31(25% complete) 3,000
25% 750Total gallons to be assigned cost 65,000
59,250
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Example Exercise 3-4
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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?
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For Practice: PE3-4A, PE3-4B
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Follow My Example 3-4
Inventory in process, beginning of period 4,000 70% 2,800
Started and completed during theperiod 54,000 100% 54,000
Transferred out of Bottling(completed) 58,000 56,800
Inventory in process, end of period 3,000 60% 1,800Total units to be assigned costs 61,000 58,600
PercentConversion Equiva-
Whole Completed lentUnits in Period Units
*(58,000 – 4,000)
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Step 3: Determine the Cost per Equivalent Unit
Inventory in process, July 1 0 1,500Started and completed in July
(62,000 – 5,000) 57,000 57,000Transferred out of Packaging Dept.
In July 57,000 58,500Inventory in process, July 31 3,000 750Total gallons to be assigned costs 60,000 59,250
DirectMaterials Conversion
Equivalent Units from Step 2
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Conversion Equivalent Unit CostConversion Equivalent Unit Cost
Direct Materials Equivalent Unit CostDirect Materials Equivalent Unit Cost
$0.30 per equivalent unit of con-version
=$17,775 conversion cost
59,250 conversion equivalent units
$66,000 direct materials cost60,000 direct materials equivalent units
$1.10 per equivalent unit of direct materials
=
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Example Exercise 3-5
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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.
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For Practice: PE3-5A, PE3-5B
Follow My Example 3-5
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Equivalent units of materials:$22,800
57,000 liters= $0.40 per liter
Equivalent units of conversion:$8,790
58,600 liters= $0.15 per liter
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Inventory in process, July 1, balance $6,225Equivalent units for completing the July 1 in-process inventory 0 1,500Equivalent unit cost x $1.10 x $0.30Cost of completed July 1 in-process inventory 0 $450 450Cost of July 1 in-process inventory
transferred to Packaging Department $6,675
Direct Conver-Materials sion Total
Costs Costs Costs
Step 4: Allocate Costs to Transferred and Partially Completed Units
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Units started and completedin July 57,000 57,000
Equivalent unit cost x $1.10 x $0.30Cost to complete the units
started and completed inJuly $62,700 $17,100 $79,800
Direct Materials Conversion TotalCosts Costs Costs
Costs Associated With the Units Started and Completed
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Equivalent units in endinginventory 3,000 750
Equivalent unit cost x $1.10 x $0.30Cost to ending inventory $ 3,300 $ 225 $3,525
Direct Materials Conversion TotalCosts Costs Costs
Costs Associated With the Partially Completed Units in the Ending Inventory
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Example Exercise3-63-2
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 Materials Conversion
Inventory in process, beginning ofperiod 0 2,800
Started and completed during the period 54,000 54,000Transferred out of Bottling (completed) 54,000 56,800Inventory in process, end of period 3,000 1,800Total 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.
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For Practice: PE3-6A, PE3-6B
Follow My Example 3-6
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Inventory in process, balance $ 1,860Inventory in process,
beginning of period 0 + 2,800 x $0.15 420Started and completed
during the period 54,000 x $0.40 + 54,000 x $0.15 29,700Transferred out of Bottling
(completed) $31,980Inventory in process, end of
period 3,000 x $0.40 + 1,800 x $0.15 1,470Total units to be assigned costs $33,450
DirectMaterials Conversion Total
Completed and transferred out of production $31,980Inventory in process, ending $ 1,470
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Cost of Production Report
A cost of production report is normally prepared
for each processing department at periodic
intervals.
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Cost of Production Report for Frozen Delight’s Mining Department—FIFO
(Continued)
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Cost of Production Report for Frozen Delight’s Mining Department—FIFO
(Concluded)
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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.
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Frozen Delight Cost per Equivalent Unit
Direct material cost per equivalent unit (June):
$5,0005,000 equivalent units of materials
$1.00 per equivalent unit=
Conversion cost per equivalent unit (June):
$1,225(5,000 x 70%) equivalent units of
conversion cost
$0.35 per equivalent unit
=
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Prepare journal entries for transactions of a
process manufacturer.
Objective 3Objective 3Objective 3Objective 3
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Journal Entries for Frozen Delight
a. Materials, including milk, cream, sugar, packaging, and indirect materials, were purchased on account, $88,000.
Materials 88,000Accounts Payable 88,000
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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.
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b. Work in Process—Mixing 66,000Work in Process—Packaging 8,000Factory Overhead—Mixing 4,125Factory Overhead—Packaging 3,000
Materials 81,125
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c. Direct labor in the Mixing and Packaging departments was $10,500 and $12,000, respectively.
Work in Process—Mixing 10,500Work in Process—Packaging 12,000
Wages Payable 22,500
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d. Equipment depreciation for the Mixing and Packaging departments was $3,350 and $1,000, respectively.
Factory Overhead—Mixing 3,350Factory Overhead—Packaging 1,000
Accumulated Depreciation— Equipment 4,350
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e. The factory overhead applied to Mixing and Packaging was $7,275 and $3,500, respectively.
Work in Process—Mixing 7,275Work in Process—Packaging 3,500
Factory Overhead— Mixing 7,275Factory Overhead— Packaging 3,500
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f. The amount of costs transferred from the Mixing Department to the Packaging Department was $86,750 per the cost of production report in Exhibit 7.
Work in Process—Packaging 86,475Work in Process—Mixing 86,475
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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 106,000Work in Process— Packaging 106,000
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h. The cost of goods sold out of the finished goods inventory was $107,000.
Cost of Goods Sold 107,000Finished Goods—Ice Cream 107,000
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Ending Inventories for Frozen Delight
July 31
Materials $ 6,875Work in Process—Mixing Dept. 3,525Work in Process—Packaging
Department 7,725Finished Goods 4,000Total inventories $22,125
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Example Exercise 3-7
3-3
The cost of materials transferred into the Bottling Department of Rocky Springs Beverage Company is $22,800, with $20,000 from the Blending Department, plus an additional $2,800 from the materials storeroom. The conversion cost for the period in the Bottling Department is $8,790 ($3,790 factory overhead applied and $5,000 direct labor).
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Example Exercise 3-7
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The total costs transferred to Finished Goods for the period was $31,980. The Bottling Department had a beginning inventory of $1,860.
a. Journalize (1) the cost of transferred-in materials, (2) conversion costs, and (3) the costs transferred out to Finished Goods.
b. Determine the balance of Work in Process—Bottling at the end of the period.
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For Practice: PE3-7A, PE3-7B
Follow My Example 3-7
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b. $1,470 ($1,860 + $22,800 + $8,790 – $31,980)
a. 1. Work in Process—Bottling 22,800Work in Process—Blending
20,000Materials
2,8002. Work in Process—Bottling 8,790
Factory Overhead—Bottling3,790
Wages Payable5,000
3. Finished Goods 31,980Work in Process—Bottling
31,980
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Use cost of production reports
for decision making.
Objective 4Objective 4Objective 4Objective 4
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Cost of Production ReportsHolland Beverage Company—Blending Department
For the Months Ended April 30 and May 31, 2008April May
Direct materials $ 20,000 $ 40,600Direct labor 15,000 29,400Energy 8,000 20,000Repairs 4,000 8,000Tank cleaning 3,000 8,000Total $ 50,000 $ 106,000Units completed / 100,000 / 200,000Cost per unit $ 0.50 $ 0.53
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Per-Unit Expense Comparisons 3-4
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In addition to unit production cost trends, managers of process
manufacturers are also concerned about yield trends. Yield is the
ratio of materials output quantity to the input quantity.
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Example Exercise 3-8
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The cost of energy consumed in producing good units in the Bottling Department of Rocky Springs Beverage Company was $8,400 and $7,400 for March and April, respectively. The number of equivalent units produced in March and April was 70,000 and 74,000 liters, respectively. Evaluate the cost of energy between the two months.
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For Practice: PE3-8A, PE3-8B
Follow My Example 3-8
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Energy cost per liter, March:$8,400
70,000 liters= $0.12
Energy cost per liter, April:$7,400
74,000 liters= $0.10
The cost of energy has appeared to improve by 2 cents per liter between March and April.
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Contrast just-in-time processing with
conventional manufacturing practices.
Objective 5Objective 5Objective 5Objective 5
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JIT is a business philosophy that focuses on reducing time and cost and eliminating poor quality.
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.
Because products have limited movement between departments, the nonvalue-added cost of transporting products and parts is reduced.
Just-in-Time Processing 3-5
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