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1 Click to edit Master title style 1 1 1 Process Cost Systems 3.

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1 1 Click to edit Master title style Process Cost Systems 3

2 2 Click to edit Master title style 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:

3 3 Click to edit Master title style 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:

4 4 Click to edit Master title style Explain and illustrate the characteristics and cost flows for a process manufacturer. Objective 1 3-1

5 5 Click to edit Master title style 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) 3-1

6 6 Click to edit Master title style Both systems: 4.Maintain perpetual materials, work in process, and finished goods inventory records. 5.Use product cost data for decision making. 3-1

7 7 Click to edit Master title style 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) 3-1

8 8 Click to edit Master title style 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. 3-1 (Concluded)

9 9 Click to edit Master title style (Continued) 3-1

10 10 Click to edit Master title style 10 (Concluded) 3-1

11 11 Click to edit Master title style 11 Process cost systems are used to manufacture homogeneous products. Examples are:  Tennis balls  Motor oil  Candy bars  Soft drinks 3-1

12 12 Click to edit Master title style 12 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) 3-1

13 13 Click to edit Master title style 13 Example Exercise Which of the following industries would normally use job order costing systems and which would normally use process costing systems? Home constructionComputer chips BeveragesCookies Military aircraftVideo game design and production 13

14 14 Click to edit Master title style 14 For Practice: PE3-1A, PE3-1B Follow My Example Home constructionJob Order BeveragesProcess Military aircraftJob Order Computer chipsProcess CookiesProcess Video game design and productionJob Order

15 15 Click to edit Master title style

16 16 Click to edit Master title style 16 Materials WIP – Mixing (a) Purchases DM WIP – Packaging DM (b) Direct Materials Exhibit 3 Cost Flows for a Process Manufacturer DMDM 3-1

17 17 Click to edit Master title style 17 Materials WIP – Mixing DM (a) Purchases DM DM WIP – Packaging (c) Direct Labor—Mixing Exhibit 3 Cost Flows for a Process Manufacturer DL DM 3-1

18 18 Click to edit Master title style 18 Materials WIP – Mixing DM (a) Purchases DM Factory OH – Packaging WIP – Packaging Exhibit 3 Cost Flows for a Process Manufacturer DL IM (d) Factory overhead incurred Factory OH – Mixing DM IM (d) Indirect materials 3-1

19 19 Click to edit Master title style 19 Exhibit 3 Cost Flows for a Process Manufacturer Materials WIP – Mixing DM (a) Purchases DM Factory OH – Packaging WIP – Packaging DL IM Factory OH – Mixing FOA FOA (e) Factory overhead applied—Mixing FOA (d) Factory overhead incurred DM 3-1

20 20 Click to edit Master title style 20 Exhibit 3 Cost Flows for a Process Manufacturer Materials WIP – Mixing DM (a) Purchases DM Factory OH – Packaging WIP – Packaging DL IM Factory OH – Mixing FOA FOA (d) Factory overhead incurred (f) Costs trans- ferred out (f) Costs transferred in CTI CTI DM 3-1

21 21 Click to edit Master title style 21 Exhibit 3 Cost Flows for a Process Manufacturer Materials WIP – Mixing DM (a) Purchases DM Factory OH – Packaging WIP – Packaging DL IM Factory OH – Mixing FOA FOA (d) Factory overhead incurred (f) Costs trans- ferred out (g) Direct labor in Packaging CTI DL DL DM 3-1

22 22 Click to edit Master title style 22 Exhibit 3 Cost Flows for a Process Manufacturer Materials WIP – Mixing DM (a) Purchases DM Factory OH – Packaging WIP – Packaging DL IM Factory OH – Mixing FOA FOA (d) Factory overhead incurred (f) Costs trans- ferred out CTI DL DM FOA (h) Factory overhead applied—Packaging FOA FOA 3-1

23 23 Click to edit Master title style 23 Exhibit 3 Cost Flows for a Process Manufacturer Materials WIP – Mixing DM (a) Purchases DM Factory OH – Packaging WIP – Packaging DL IM Factory OH – Mixing FOA FOA (d) Factory overhead incurred (f) Costs trans- ferred out CTI DL DM FOA (i) Costs trans- ferred out Finished Goods FOA (i) Cost transferred in from WIP—Packaging CTI CTI

24 24 Click to edit Master title style 24 Exhibit 3 Cost Flows for a Process Manufacturer Materials WIP – Mixing DM (a) Purchases DM Factory OH – Packaging WIP – Packaging DL IM Factory OH – Mixing FOA FOA (d) Factory overhead incurred (f) Costs trans- ferred out CTI DL DM FOA (i) Costs trans- ferred out Finished Goods FOA (j) Cost transferred to Cost of Goods Sold CGS CTI 24 CGS Cost of Goods Sold CGS 3-1

25 25 Click to edit Master title style 25 Prepare a cost of production report accounting for completed and partially completed units under the FIFO method. Objective 2 3-2

26 26 Click to edit Master title style 26 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 July10,500 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? 3-2 Mixing Department of Frozen Delight 26

27 27 Click to edit Master title style 27 Step 1:Determine the Units to Be Assigned Costs Total gallons charged to production: In process July 15,000 gallons Received from materials storage60,000 gallons Total units accounted for by the Mixing Department65,000 gallons 3-2

28 28 Click to edit Master title style

29 29 Click to edit Master title style 29 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. 3-2

30 30 Click to edit Master title style 30 Example Exercise 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? 30

31 31 Click to edit Master title style 31 For Practice: PE3-2A, PE3-2B Follow My Example ,000 liters started and completed (58,000 completed – 4,000 beginning work in process)

32 32 Click to edit Master title style 32 Step 2:Calculate Equivalent Units of Production 3-2 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.

33 33 Click to edit Master title style 33 Frozen Delight’s Equivalent Units Computation for Materials in July PercentEquivalent TotalMaterialsUnits for WholeAddedDirect Unitsin JulyMaterials Inventory in process, July 15,0000%0 Started and completed in July (62,000 – 5,000) 57,000100% 57,000 Transferred out to Packaging Dept.62,000—57,000 Inventory in process, July 31 3,000100% 3,000 Total gallons to be assigned cost65,00060,000 Important: Note the word “Added” 3-2

34 34 Click to edit Master title style

35 35 Click to edit Master title style 35 Example Exercise 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? 35

36 36 Click to edit Master title style 36 For Practice: PE3-3A, PE3-3B Follow My Example 3-3 Inventory in process, beginning of period4,000 0%0 Started and completed during the period54, %54,000 Transferred out of Bottling (completed)58,00054,000 Inventory in process, end of period 3, % 3,000 Total units to be assigned costs61,00057,000 Percent MaterialsEquiva- WholeAddedlent Unitsin JulyUnits Answer: 57,000 equivalent units

37 37 Click to edit Master title style 37 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. 3-2

38 38 Click to edit Master title style 38 Percent TotalConversionEquivalent WholeCompletedUnits for Unitsin JulyConversion Inventory in process, July 1 (70% complete)5,00030%1,500 Started 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) 3,00025% 750 Total gallons to be assigned cost65,00059,

39 39 Click to edit Master title style

40 40 Click to edit Master title style 40 Example Exercise 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? 40

41 41 Click to edit Master title style 41 For Practice: PE3-4A, PE3-4B Follow My Example 3-4 Inventory in process, beginning of period4,000 70%2,800 Started and completed during the period54, %54,000 Transferred out of Bottling (completed)58,00056,800 Inventory in process, end of period 3,000 60% 1,800 Total units to be assigned costs61,00058,600 Percent ConversionEquiva- WholeCompletedlent Unitsin PeriodUnits *(58,000 – 4,000)

42 42 Click to edit Master title style 42 Step 3:Determine the Cost per Equivalent Unit Inventory in process, July 101,500 Started and completed in July (62,000 – 5,000) 57,00057,000 Transferred out of Packaging Dept. In July57,00058,500 Inventory in process, July 31 3, Total gallons to be assigned costs60,00059,250 Direct MaterialsConversion Equivalent Units from Step 2 3-2

43 43 Click to edit Master title style 43 Conversion Equivalent Unit Cost Conversion Equivalent Unit Cost Direct Materials Equivalent Unit Cost Direct 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 cost 60,000 direct materials equivalent units $1.10 per equivalent unit of direct materials = 3-2

44 44 Click to edit Master title style 44 Example Exercise 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. 44

45 45 Click to edit Master title style 45 For Practice: PE3-5A, PE3-5B Follow My Example Equivalent units of materials: $22,800 57,000 liters = $0.40 per literEquivalent units of conversion: $8,790 58,600 liters = $0.15 per liter

46 46 Click to edit Master title style 46 Inventory in process, July 1, balance $6,225 Equivalent units for completing the July 1 in-process inventory01,500 Equivalent unit costx $1.10x $0.30 Cost of completed July 1 in- process inventory0$ Cost of July 1 in-process inventory transferred to Packaging Department$6,675 Direct Conver- MaterialssionTotal CostsCostsCosts Step 4:Allocate Costs to Transferred and Partially Completed Units 3-2

47 47 Click to edit Master title style 47 Units started and completed in July57,00057,000 Equivalent unit costx $1.10x $0.30 Cost to complete the units started and completed in July$62,700$17,100$79,800 Direct MaterialsConversionTotal CostsCostsCosts Costs Associated With the Units Started and Completed 3-2

48 48 Click to edit Master title style 48 Equivalent units in ending inventory3, Equivalent unit costx $1.10x $0.30 Cost to ending inventory$ 3,300$ 225$3,525 Direct MaterialsConversionTotal CostsCostsCosts Costs Associated With the Partially Completed Units in the Ending Inventory 3-2

49 49 Click to edit Master title style 49 Example Exercise 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 MaterialsConversion Inventory in process, beginning of period02,800 Started and completed during the period54,00054,000 Transferred out of Bottling (completed)54,00056,800 Inventory in process, end of period 3,000 1,800 Total units to be assigned costs57,00058,600 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. 49

50 50 Click to edit Master title style 50 For Practice: PE3-6A, PE3-6B Follow My Example Inventory in process, balance$ 1,860 Inventory in process, beginning of period0+2,800 x $ Started and completed during the period54,000 x $ ,000 x $ ,700 Transferred out of Bottling (completed)$31,980 Inventory in process, end of period3,000 x $0.40+1,800 x $0.15 1,470 Total units to be assigned costs$33,450 Direct MaterialsConversionTotal Completed and transferred out of production$31,980 Inventory in process, ending$ 1,470

51 51 Click to edit Master title style 51 Cost of Production Report A cost of production report is normally prepared for each processing department at periodic intervals. 3-2

52 52 Click to edit Master title style 52 Cost of Production Report for Frozen Delight’s Mining Department—FIFO (Continued) 3-2

53 53 Click to edit Master title style 53 Cost of Production Report for Frozen Delight’s Mining Department—FIFO (Concluded) 3-2

54 54 Click to edit Master title style 54 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. 3-2

55 55 Click to edit Master title style 55 Frozen Delight Cost per Equivalent Unit Direct material cost per equivalent unit (June): $5,000 5,000 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 = 3-2

56 56 Click to edit Master title style 56 Prepare journal entries for transactions of a process manufacturer. Objective 3 3-3

57 57 Click to edit Master title style 57 Journal Entries for Frozen Delight a.Materials, including milk, cream, sugar, packaging, and indirect materials, were purchased on account, $88,000. Materials88,000 Accounts Payable88,

58 58 Click to edit Master title style 58 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. 3-3

59 59 Click to edit Master title style 59 b.Work in Process—Mixing 66,000 Work in Process—Packaging8,000 Factory Overhead—Mixing4,125 Factory Overhead—Packaging3,000 Materials81,

60 60 Click to edit Master title style 60 c.Direct labor in the Mixing and Packaging departments was $10,500 and $12,000, respectively. Work in Process—Mixing10,500 Work in Process—Packaging12,000 Wages Payable22,

61 61 Click to edit Master title style 61 d.Equipment depreciation for the Mixing and Packaging departments was $3,350 and $1,000, respectively. Factory Overhead—Mixing3,350 Factory Overhead—Packaging1,000 Accumulated Depreciation— Equipment4,

62 62 Click to edit Master title style 62 e.The factory overhead applied to Mixing and Packaging was $7,275 and $3,500, respectively. Work in Process—Mixing7,275 Work in Process—Packaging3,500 Factory Overhead— Mixing7,275 Factory Overhead— Packaging3,

63 63 Click to edit Master title style 63 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—Packaging86,475 Work in Process—Mixing86,

64 64 Click to edit Master title style 64 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 Cream106,000 Work in Process— Packaging106,

65 65 Click to edit Master title style 65 h. The cost of goods sold out of the finished goods inventory was $107,000. Cost of Goods Sold107,000 Finished Goods—Ice Cream107,

66 66 Click to edit Master title style 66 Ending Inventories for Frozen Delight July 31 Materials$ 6,875 Work in Process—Mixing Dept.3,525 Work in Process—Packaging Department7,725 Finished Goods 4,000 Total inventories$22,

67 67 Click to edit Master title style 67 Example Exercise 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). 67 (Continued)

68 68 Click to edit Master title style 68 Example Exercise 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. 68 (Concluded)

69 69 Click to edit Master title style 69 For Practice: PE3-7A, PE3-7B Follow My Example b. $1,470 ($1,860 + $22,800 + $8,790 – $31,980) a.1. Work in Process—Bottling22,800 Work in Process—Blending20,000 Materials2, Work in Process—Bottling8,790 Factory Overhead—Bottling3,790 Wages Payable5, Finished Goods31,980 Work in Process—Bottling31,980

70 70 Click to edit Master title style 70 Use cost of production reports for decision making. Objective 4 3-4

71 71 Click to edit Master title style 71 Cost of Production Reports Holland Beverage Company—Blending Department For the Months Ended April 30 and May 31, 2008 AprilMay Direct materials$ 20,000$ 40,600 Direct labor15,00029,400 Energy8,00020,000 Repairs4,0008,000 Tank cleaning 3,000 8,000 Total$ 50,000$ 106,000 Units completed/ 100,000/ 200,000 Cost per unit$ 0.50$

72 72 Click to edit Master title style 72 Per-Unit Expense Comparisons 3-4

73 73 Click to edit Master title style 73 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. 3-4

74 74 Click to edit Master title style 74 Example Exercise 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. 74

75 75 Click to edit Master title style 75 For Practice: PE3-8A, PE3-8B Follow My Example Energy cost per liter, March: $8,400 70,000 liters = $0.12Energy 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.

76 76 Click to edit Master title style 76 Contrast just-in-time processing with conventional manufacturing practices. Objective 5 3-5

77 77 Click to edit Master title style 77  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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