Chapter 19 Process Cost Systems Accounting 21 st

Chapter 19 Process Cost Systems Accounting, 21 st Edition Warren Reeve Fess Power. Point Presentation by Douglas Cloud Professor Emeritus of Accounting Pepperdine University © Copyright 2004 South-Western, a division of Thomson Learning. All rights reserved. Task Force Image Gallery clip art included in this electroni presentation is used with the permission of NVTech Inc.

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Objectives 1. Distinguish between jobthis costing order After studying and process costing systems. chapter, you should 2. Explain and illustrate to: physical flows be able the 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.

Objectives 5. Prepare journal entries for transactions of a process manufacturer. 6. Use cost of production reports for decision making. 7. Contrast just-in-time processing with conventional manufacturing practices.

Comparing Job Order Costing and Process Costing Job Order Cost System Work in Process Account Factorymaterials Direct labor Direct overhead Job Cost Sheets Dept. A and Dept. B to Finished Goods

Comparing Job Order Costing and Process Costing Process Cost System Work in Process Account Direct materials Work in Process Account DEPT. A DEPT. B Factory Direct Overhead Labor to Finished Goods

Comparing Job Order Costing and Process Costing Both systems: ü determine a product cost by measuring the amount of direct materials and direct labor used and allocating overhead costs. ü allocate overhead using a predetermined overhead rate (or activity-based costing). ü maintain perpetual inventory records with subsidiary ledgers for Materials, Work in Process, and Finished Goods.

Physical Flows for a Process Manufacturer Scrap Metal Materials Melting Department Casting Department

Physical Flows for a Process Manufacturer Molten metal transferred from Melting Department Casting Department To finished goods

Cost Flows for a Process Manufacturer Materials Purchases of DM direct and indirect materials Factory OH – Melting WIP – Casting DM Factory OH – Casting Finished Goods Cost of Goods Sold DM Direct materials used in production

Cost Flows for a Process Manufacturer Materials Purchases of DM direct and indirect materials Factory OH – Melting WIP – Melting DM DL Factory OH – Casting Actual costs incurred DL WIP – Casting Direct labor used in production Finished Goods Cost of Goods Sold

Cost Flows for a Process Manufacturer Materials Purchases of DM direct and IM indirect materials WIP – Melting DM DL Factory OH – Melting Factory OH – Casting Actual costs incurred IM WIP – Casting Finished Goods Cost of Goods Sold Indirect materials used in production

Cost Flows for a Process Manufacturer Materials Purchases of DM direct and IM indirect materials Factory OH – Melting Actual costs incurred FOA WIP – Melting WIP – Casting DM DL FOA Factory OH – Casting Actual costs incurred Factory overhead applied Finished Goods Cost of Goods Sold

Cost Flows for a Process Manufacturer Materials Purchases of DM direct and IM indirect materials Factory OH – Melting Actual costs incurred TO/TI FOA WIP – Melting DM TO WIP – Casting TI DL FOA Factory OH – Casting Actual costs incurred Finished Goods Cost of Goods Sold Cost transferred out/transferred in

Cost Flows for a Process Manufacturer Materials Purchases of DM direct and IM indirect materials Factory OH – Melting Actual costs incurred DL FOA WIP – Melting DM TO WIP – Casting TI DL DL FOA Factory OH – Casting Actual costs incurred Finished Goods FOA Direct labor used in production Factory overhead applied Cost of Goods Sold

Cost Flows for a Process Manufacturer Materials Purchases of DM direct and IM indirect materials Factory OH – Melting Actual costs incurred TO/TI FOA WIP – Melting DM WIP – Casting TO TI DL DL FOA TO FOA Factory OH – Casting Actual costs incurred Finished Goods FOA TI Cost of Goods Sold Cost transferred out/transferred in

Cost Flows for a Process Manufacturer Materials Purchases of DM direct and IM indirect materials Factory OH – Melting Actual costs incurred FOA WIP – Melting DM TO WIP – Casting TI DL DL FOA Factory OH – Casting Actual costs incurred FOA Finished Goods TI Cost of goods sold COGS Cost of Goods Sold COGS TO

Melting Department of Mc. Dermott Steel Inc. Inventory in process, July 1, 500 tons: Direct materials cost, 500 tons Conversion costs, 500 tons, 70% completed Total inventory in process, July 1 Direct materials cost for July, 1, 000 tons Conversion costs for July Goods transferred to Casting in July, 1, 100 tons Inventory in process, July 31, 400 tons, 25% complete as to conversion costs $24, 550 3, 600 $28, 150 50, 000 9, 690 ? ?

Step 1: Determine the Units to be Assigned Costs Work in Process – Melting Beginning Inventory 500 Tons Started 1, 000 Tons

Step 1: Determine the Units to be Assigned Costs Work in Process – Melting Beginning Inventory 500 Tons Started 1, 000 Tons Transferred 1, 100 Tons In a perpetual inventory system, outflows are recorded as they occur.

Step 1: Determine the Units to be Assigned Costs Work in Process – Melting Beginning Inventory 500 Tons Started 1, 000 Tons Transferred 1, 100 Tons Ending Inventory 400 Tons 1 Beginning Inventory 500 Tons

Step 1: Determine the Units to be Assigned Costs Work in Process – Melting Beginning Inventory 500 Tons Started 1, 000 Tons Transferred 1, 100 Tons Ending Inventory 400 Tons 1 Beginning Inventory 500 Tons + 2 Started & Completed ? Tons

Step 1: Determine the Units to be Assigned Costs Work in Process – Melting Beginning Inventory 500 Tons Started 1, 000 Tons Transferred 1, 100 Tons Ending Inventory 400 Tons 1 Beginning Inventory 500 Tons + 2 Started & Completed 600 Tons

Step 1: Determine the Units to be Assigned Costs Work in Process – Melting Beginning Inventory 500 Tons Started 1, 000 Tons Transferred 1, 100 Tons Ending Inventory 400 Tons 1 Beginning Inventory 500 Tons + 2 Started & Completed 600 Tons = Transferred Out + 3 Ending Inventory Total tons to be assigned costs Total units = 1, 100 Tons 400 Tons 1, 500 Tons

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

Step 2: Calculate Equivalent Units of Production JULY 1 500 tons beginning inventory 1, 000 Equivalent Units JULY 31 Note: Started and completed EU of 600 tons started and completed materials 100% materials added in June No materials 600 EU of materials equivalent units added Inventory in to beginning inventory 100% materials added in July process, July 1 400 tons ending inventory for July 500 Inventory in process, July 31 EU of materials 100% materials added in July 400

Step 2: Calculate Equivalent Units of Production Conversion Equivalent Units Inventory in process, July 1 Started and completed in July Transferred out to Casting Dept. Inventory in process, July 31 Total tons to be assigned cost Total Percent Equivalent Units Added Units 500 30% 600 100% 1, 100 400 25% 1, 500 150 600 750 100 850

Step 2: Calculate Equivalent Units of Production JULY 1 850 Equivalent Units JULY 31 500 tons beginning inventory 350 EU 150 600 tons started and completed Inventory in process, July 31 (75% to be completed for conversion in August) EU 70% completed for 30% conversion in June completed 600 EU for 100% completed for conversion Inventory in in July 400 tons ending inventory process, July 1 100 25% completed for EU conversion in July 300 EU

Step 3: Determine the Cost per Equivalent Units Direct Materials Inventory in process, July 1 Started and completed in July (1, 100 – 500) Transferred out to Casting Dept. July Inventory in process, July 31 Total tons to be assigned cost Conversion 0 150 600 in 600 400 1, 000 750 100 850

Step 3: Determine the Cost per Equivalent Unit Work in Process – Melting Beginning Inventory $28, 150 Materials $50, 000 Conversion Costs Direct Materials Equivalent Unit Cost $50, 000 direct materials cost 1, 000 direct materials equivalent units = $50. 00 per EU of DM Conversion Equivalent Unit Cost $9, 690 conversion cost 850 conversion equivalent units = $11. 40 per EU of conversion

Step 4: Allocate Costs to Transferred and Partially Completed Units Direct Materials Conversion Total Costs Inventory in process, July 1 beginning balance Equivalent units for completing the July in-process inventory Equivalent unit cost Cost of completed July 1 inprocess inventory Cost of July 1 in-process inventory transferred to Casting Department $28, 150 0 x $50. 00 150 x $11. 40 $0 $1, 710 $29, 860

Step 4: Allocate Costs to Transferred and Partially Completed Units Direct Materials Conversion Total Costs Units started and completed in July Equivalent unit cost Cost to complete the units started and completed in July 600 x$50. 00 600 x$11. 40 $30, 000 $6, 840 $36, 840

Step 4: Allocate Costs to Transferred and Partially Completed Units Direct Materials Conversion Total Costs Equivalent units in ending inventory Equivalent unit cost Cost of ending inventory 400 x$50. 00 $20, 000 100 x$11. 40 $ 1, 140 $21, 140

Step 4: Allocate Costs to Transferred and Partially Completed Units Work in Process – Melting Beginning Inventory $28, 150 Beginning Inventory $29, 860 Materials Costs $50, 000 Started and Completed $36, 840 Conversion Costs $9, 690 Ending Inventory $21, 140 Costs Beginning cost $28, 150 M 500 x 0% x C 500 x 30% x $50. 00 = $11. 40 = 0 1, 710 M 600 x 100% x $29, 860 C 600 x 100% x $50. 00 = $11. 40 = $30, 000 6, 840 $36, 840 M 400 x 100% x C 400 x 25% x $50. 00 = $11. 40 = $20, 000 1, 140 $21, 140 Total Costs Charged $87, 840 Total Costs Assigned $87, 840

A cost of production report is prepared for each processing department at periodical intervals.

Cost 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.

Cost of Production Report—Melting Department Units charged to production: Inventory in process, July 1 Received from materials Total units accounted for Units to be assigned cost: Inventory in process, July 1 500 Started and completed in July Transferred to Casting Dept. Inventory in process, July 31 400 Total units to be assigned cost Whole Units Equivalent Units Direct Materials Conversion 500 1, 000 1, 500 0 600 1, 100 (70% complete) 150 600 600 750 400 Step 1 1, 500 (25% complete) 100 Step 2 1, 000 850

Cost of Production Report—Melting Department Costs Unit costs: Total costs for July in Melting Department Total equivalent units (from Slide 43) Cost per equivalent unit Costs Direct Materials Conversion $50, 000 $9, 690 ÷ 1, 000 $ 50. 00 ÷ 850 $11. 40 Step 3 Total Costs

Cost of Production Report—Melting Department Costs charged to production: Inventory in process, July 1 Cost incurred in July Total costs accounted for Costs allocated to completed and partially completed units Inventory in process, July 1 To complete inventory of July 1 Started and completed in July Transferred to Casting Dept. Inventory in process, July 31 Total costs assigned Direct Conversion Total Materials Costs $28, 150 59, 690 $87, 840 $ 0 30, 000 $1, 710 6, 840 $20, 000 $1, 140 Step 4 $28, 150 1, 710 36, 840 $66, 700 21, 140 $87, 840

Journal Entries for a Process Cost System Transaction Journal Entry Debit a. Materials purchased Materials 62, 000 on account. Accounts Payable b. Direct and indirect materials requisitioned. c. Direct labor used. d. Depreciation expenses. Credit 62, 000 Work in Process–Melting Factory Overhead–Casting Materials 50, 000 4, 000 3, 000 57, 000 Work in Process–Melting Work in Process–Casting Wages Payable 5, 000 4, 500 Factory Overhead–Melting 1, 000 Factory Overhead–Casting 7, 000 Accumulated Depreciation 8, 000 9, 500

Journal Entries for a Process Cost System Transaction e. Factory overhead applied. f. Costs transferred to Casting Department Journal Entry Debit Credit Work in Process–Melting 4, 690 Work in Process–Casting 9, 640 Factory Overhead–Melting 4, 690 Factory Overhead–Casting 9, 640 Work in Process–Casting 66, 700 g. Casting Department Work in Finished Goods. Process–Melting 78, 600 transferred to 66, 700 Work in Process–Casting Finished Goods 78, 600 h. Goods sold. Cost of Goods Sold Finished Goods 73, 700

Just-in-Time Processing (JIT) ü JIT is a business philosophy that focuses on reducing time and cost and eliminating poor quality. ü JIT organizes work cells that perform several manufacturing steps. ü Workers are cross-trained to perform more than one task. This provides flexibility and worker pride and involvement in the final product. ü Because products have limited movement between departments, the nonvalue-added cost of transporting products and parts is reduced.

Just-in-Time Processing (JIT) Traditional Production Line Cutting Dept. Drilling Dept. Assembly Dept. Sanding Dept. Upholstery Dept. Staining Dept. Varnishing Dept.

Just-in-Time Processing (JIT) Just-in-Time Production Line Work Center One Cutting drilling and sanding Work Center Two Staining and varnishing Work Center Three Upholstery and assembly

Chapter 19 The End