chapter 17 process cost systems financial and managerial accounting 8th edition warren reeve fess...

Chapter Chapter 1717

Process Cost SystemsProcess Cost Systems

Financial and Managerial Accounting

8th Edition

Warren Reeve Fess

PowerPoint Presentation by Douglas CloudProfessor Emeritus of AccountingPepperdine University

© Copyright 2004 South-Western, a division of Thomson Learning. All rights reserved.

Task Force Image Gallery clip art included in this electronic presentation is used with the permission of NVTech Inc.

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 completed units under the fifo method.

4. Prepare a cost of production report.

ObjectivesObjectivesObjectivesObjectives

5. Prepare journal entries for transactions of a process manufacturer.

ObjectivesObjectivesObjectivesObjectives

6. Use cost of production reports for decision making.

7. Contrast just-in-time processing with conventional manufacturing practices.

Job Order Cost System

Job CostSheets

Dept. A and Dept. B

Comparing Job Order Comparing Job Order Costing and Process CostingCosting and Process Costing


Direct materialsDirect materialsDirect materialsDirect materialsFactory overheadFactory overheadFactory overheadFactory overheadDirect laborDirect laborDirect laborDirect labor

Work in Process Work in Process AccountAccount to Finished to Finished

GoodsGoodsto Finished to Finished

GoodsGoods

Process Cost System

DirectDirect materialsmaterials

Work in Process Work in Process AccountAccount

Work in Process Work in Process AccountAccount

DEPT. A DEPT. B

Factory Factory OverheadOverhead

Direct Direct LaborLabor

Factory Factory OverheadOverhead

Direct Direct LaborLabor

to Finished to Finished GoodsGoods

to Finished to Finished GoodsGoods



determine a product cost by measuring the amount of direct materials and direct labor used and allocating overhead costs.

allocate overhead using a predetermined overhead rate (or activity-based costing).

maintain perpetual inventory records with subsidiary ledgers for Materials, Work in Process, and Finished Goods.

Both systems:Both systems:



Physical Flows for a Process ManufacturerPhysical Flows for a Process ManufacturerPhysical Flows for a Process ManufacturerPhysical Flows for a Process Manufacturer

Scrap Metal

Materials

MeltingMeltingDepartmentDepartment

CastingCastingDepartmentDepartment

Molten metal

transferred from

Melting

To finished goods

CastingCastingDepartmentDepartment

MeltingMeltingDepartmentDepartment

Physical Flows for a Process ManufacturerPhysical Flows for a Process ManufacturerPhysical Flows for a Process ManufacturerPhysical Flows for a Process Manufacturer

Materials WIP – Melting

Factory OH – Melting

DMDMPurchases of direct and

indirect materials

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


DMDM

DLDL

DMDM

Direct labor used in productionDLDL

Purchases of direct and

indirect materials

Finished Goods

Cost of Goods Sold


Actualcosts

incurred

WIP – Casting




Finished Goods

WIP – Casting

Cost of Goods Sold

DMDM

DLDL

DMDM

Indirect materials used in productionIMIM


indirect materials

IMIM

Factory OH – CastingFactory OH – Melting

Actualcosts

incurred

Actualcosts

incurred



Finished Goods

WIP – Casting

Cost of Goods Sold

DMDM

DLDL

DMDM

Factory overhead appliedFOAFOA


indirect materials

IMIM


Actualcosts

incurred

FOAFOA Actualcosts

incurred

FOAFOA




Finished Goods

WIP – Casting

Cost of Goods Sold

DMDM

DLDL

DMDM

Cost transferred out/transferred inTO/TITO/TI


indirect materials

IMIM


Actualcosts

incurred

FOAFOA Actualcosts

incurred

FOAFOA

TOTO TITI




Finished Goods

WIP – Casting

Cost of Goods Sold

DMDM

DLDL


indirect materials

IMIM


Actualcosts

incurred

FOAFOA Actualcosts

incurred

FOAFOA

TOTO TITI

DLDL

Factory overhead appliedFOAFOA

Direct labor used in productionDLDL

FOAFOA

FOAFOA




Finished Goods

WIP – Casting

Cost of Goods Sold

DMDM

DLDL


indirect materials

IMIM


Actualcosts

incurred

FOAFOA Actualcosts

incurred

FOAFOA

TOTO TITI

DLDL

FOAFOA

FOAFOA

Cost transferred out/transferred inTO/TITO/TI

TOTO

TITI





Finished Goods

WIP – Casting

Cost of Goods Sold

DMDM

DLDL


indirect materials

IMIM


Actualcosts

incurred

FOAFOA Actualcosts

incurred

FOAFOA

TOTO TITI

DLDL

FOAFOA

FOAFOA

Cost of goods soldCOGSCOGS

TOTO

TITI COGSCOGS

COGSCOGS


Melting Department of McDermott Steel Inc.

Inventory in process, July 1, 500 tons:Direct materials cost, 500 tons $24,550Conversion costs, 500 tons, 70% completed 3,600Total inventory in process, July 1 $28,150

Direct materials cost for July, 1,000 tons 50,000Conversion costs for July 9,690Goods transferred to Casting in July, 1,100 tons ?Inventory in process, July 31, 400 tons, 25%

complete as to conversion costs ?

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

BeginningBeginningInventoryInventory500 Tons500 Tons

Work in Process – Melting

StartedStarted1,000 Tons1,000 Tons




Transferred1,100 Tons

In a perpetual inventory system,

outflows are recorded as they occur.

In a perpetual inventory system,

outflows are recorded as they occur.






EndingInventory400 Tons


Beginning InventoryBeginning Inventory 500 Tons 500 Tons11







Beginning Inventory Beginning Inventory 500 Tons500 Tons11

Started & Completed ? Tons+

22







Beginning Inventory Beginning Inventory 500 Tons500 Tons11

Started & Completed 600 Tons+

22






Beginning InventoryBeginning Inventory 500 Tons 500 Tons11

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 be Total tons to be assigned costsassigned costs

The equivalent units of production are the number of

units that could have been completed within a given

accounting period.

The equivalent units of production are the number of

units that could have been completed within a given

accounting period.

Step 2: Calculate equivalent units of production

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

Materials Equivalent UnitsMaterials Equivalent UnitsTotal Percent EquivalentUnits Added Units

Inventory in process, July 1 500 0% 0Started and completed in July 600 100% 600Transferred out to Casting Dept. 1,100 600Inventory in process, July 31 400 100% 400Total tons to be assigned cost 1,500 1,000


500500 EU of EU of materialsmaterials

500 500 tons beginning inventorytons beginning inventory

100% materials added in June100% materials added in June

JULY 1

600600 EU of EU of materialsmaterials

600 tons started and completed

100% materials added in July

JULY 31

400 EU of materials

400 tons ending inventory

100% materials added in July

1,000 Equivalent Units

Inventory in process, July 1

Note: Started and completed


No materials equivalent units

added to beginning inventory for July


Conversion Equivalent UnitsConversion Equivalent Units

Inventory in process, July 1 500 30% 150Started and completed in July 600 100% 600Transferred out to Casting Dept. 1,100 750Inventory in process, July 31 400 25% 100Total tons to be assigned cost 1,500 850

Total Percent EquivalentUnits Added Units

350350 EUEU

500 tons beginning inventory

70% completed for 70% completed for conversion in Juneconversion in June

JULY 1

600 600 EUEU

600 tons started and completed

100% completed for conversion in July

JULY 31

100 100 EUEU

400 tons ending inventory

25% completed for 25% completed for conversion in Julyconversion in July

850 Equivalent Units



150150EUEU

300 300 EUEU

Inventory in process, July 31 (75% to be completed for conversion in

August)

30% completed

for conversion

in July

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

Equivalent Units Direct Materials Conversion

Inventory in process, July 1 0 150

Started and completed in July (1,100 – 500) 600 600

Transferred out to Casting Dept.in July 600 750

Inventory in process, July 31 400 100

Total tons to be assigned cost 1,000 850

BeginningInventory$28,150


Materials$50,000

ConversionCosts

$9,690 Conversion Equivalent Unit CostConversion Equivalent Unit Cost

Direct Materials Equivalent Unit CostDirect Materials Equivalent Unit Cost

$11.40 per EU of con-version

=

$50,000 direct materials cost1,000 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

=

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 $11.40Cost of completed July 1 in-

process inventory $0 $1,710 1,710Cost of July 1 in-process

inventory transferred to Casting Department $29,860

Step 4: Allocate Costs to Transferred and Step 4: Allocate Costs to Transferred and Partially Completed UnitsPartially Completed Units

Direct Materials Conversion TotalCosts Costs Costs

Units started and completedin July 600 600

Equivalent unit cost x $50.00 x $11.40Cost to complete the units

started and completed inJuly $ 30,000 $ 6,840 $36,840



Equivalent units in endinginventory 400 100

Equivalent unit cost x $50.00 x $11.40Cost of ending inventory $ 20,000 $ 1,140 $21,140




MaterialsCosts

$50,000

Started andCompleted

$36,840



Total CostsCharged$87,840

EndingInventory$21,140

ConversionCosts$9,690

Total CostsAssigned$87,840

M 600 x 100% x $50.00 = $30,000C 600 x 100% x $11.40 = 6,840

$36,840

M 400 x 100% x $50.00 = $20,000C 400 x 25% x $11.40 = 1,140

$21,140

Beginning cost $28,150M 500 x 0% x $50.00 = 0C 500 x 30% x $11.40 = 1,710

$29,860

Total Costs Assigned $87,840

Costs


A cost of production report is prepared for each processing

department at periodical intervals.

A cost of production report is prepared for each processing

department at periodical intervals.

Cost of Production ReportCost of Production ReportCost of Production ReportCost of Production Report

The cost of production report provides the following production quantity and cost data:

The units for which the department is accountable and the deposition of those units.

The production costs incurred by the department and the allocation of those costs between completed and partially completed units.

A cost of production report also is used to control costs.A cost of production report also is used to control costs.

UnitsUnits

Step 1 Step 2

Units charged to production:Inventory in process, July 1 500Received from materials 1,000Total units accounted for 1,500

Units to be assigned cost:Inventory in process, July 1

(70% complete) 500 0 150Started and completed in July 600 600 600Transferred to Casting Dept. 1,100 600 750Inventory in process, July 31

(25% complete) 400 400 100Total units to be assigned cost 1,500 1,000 850

Whole Direct Units Materials Conversion

Equivalent Units

Cost of Production ReportCost of Production Report—Melting Department—Melting Department

CostsCosts Direct Materials Conversion Total CostsCosts

Step 3

Unit costs:Total costs for July in

Melting Department $50,000 $9,690Total equivalent units

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


CostsCosts Direct Conversion Total Materials Costs Costs

Step 4

Costs charged to production:Inventory in process, July 1 $28,150Cost incurred in July 59,690Total costs accounted for $87,840

Costs allocated to completed andpartially completed unitsInventory in process, July 1 $28,150To complete inventory of July 1 $ 0 $1,710 1,710Started and completed in July 30,000 6,840 36,840Transferred to Casting Dept. $66,700Inventory in process, July 31 $20,000 $1,140 21,140Total costs assigned $87,840


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

Materials 62,000Accounts Payable 62,000

Work in Process–Melting 50,000Factory Overhead–Melting 4,000Factory Overhead–Casting 3,000

Materials 57,000

Work in Process–Melting 5,000Work in Process–Casting 4,500

Wages Payable 9,500

Factory Overhead–Melting 1,000Factory Overhead–Casting 7,000

Accumulated Depreciation 8,000

a. Materials purchased on account.

b. Direct and indirect materials requisitioned.

c. Direct laborused.

d. Depreciation expenses.

Transaction Journal Entry Debit Credit

Work in Process–Melting 4,690Work in Process–Casting 9,640

Factory Overhead–Melting 4,690Factory Overhead–Casting 9,640

Work in Process–Casting 66,700Work in Process–Melting 66,700

e. Factory overhead applied.

f. Costs transferred to Casting Department

g. Casting Department transferred to Finished Goods

h. Goods sold.

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

Finished Goods 78,600Work in Process–Casting 78,600

Cost of Goods Sold 73,700Finished Goods 73,700

Transaction Journal Entry Debit Credit

Just-in-Time Processing (JIT)Just-in-Time Processing (JIT)Just-in-Time Processing (JIT)Just-in-Time Processing (JIT)

JIT is a business philosophy that focuses on reducing time and cost and eliminating poor quality.

JIT organizes work 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.

Upholstery Upholstery Dept.Dept.

Assembly Assembly Dept.Dept.


Cutting Cutting Dept.Dept.

Traditional Production LineTraditional Production Line

DrillinDrilling Dept.g Dept.

Sanding Sanding Dept.Dept.

Staining Staining Dept.Dept.

Varnishing Varnishing Dept.Dept.


Just-in-Time Production LineJust-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

chapter 17 process cost systems financial and managerial accounting 8th edition warren reeve fess...

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