1. Principles of Cost Accounting 15 th edition Edward J. VanDerbeck © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 1

2. Chapter 5 Process Cost Accounting General Procedures 2

3. Learning Objectives LO1Recognize the differences between job order and process cost accounting systems. LO2Compute unit costs in a process cost system. LO3Assign costs to inventories, using equivalent units of production with the average cost method. 3

4. Learning Objectives (cont.) LO4Prepare a cost of production summary and journal entries for one department with no beginning inventory. LO5Prepare a cost of production summary and journal entries for one department with beginning inventory. 4

5. Learning Objectives (cont.) LO6Prepare a cost of production summary and journal entries for multiple departments with no beginning inventory. LO7Prepare a cost of production summary and journal entries for multiple departments with beginning inventory. 5

6. Learning Objectives (cont.) LO8Prepare a cost of production summary with a change in the prior department’s unit transfer cost. 6

7. Comparison of Basic Cost Systems Job order cost system is appropriate when differentiated products or services are provided on a special order basis. Job order cost system is appropriate when differentiated products or services are provided on a special order basis. Process cost system is used when goods or services of a similar nature are provided. Process cost system is used when goods or services of a similar nature are provided. 7

8. Materials and Labor Costs The focus of a process system is the factory cost center. The focus of a process system is the factory cost center. In a process cost system, the costs of materials and labor are charged directly to the department where they are incurred. In a process cost system, the costs of materials and labor are charged directly to the department where they are incurred. Indirect materials that cannot be directly associated with a particular department are charged to factory overhead. Indirect materials that cannot be directly associated with a particular department are charged to factory overhead. 8

9. Factory Overhead Costs Overhead costs are accumulated from the various journals in the same manner as in a job order cost system. Overhead costs are accumulated from the various journals in the same manner as in a job order cost system. The applicable factory overhead from a service department is distributed to the production departments. The applicable factory overhead from a service department is distributed to the production departments. The use of predetermined rates is common in a process cost system, but overhead is applied to departments rather than to jobs. The use of predetermined rates is common in a process cost system, but overhead is applied to departments rather than to jobs. 9

10. Product Costs in a Process Cost System The total cost of each item produced is the combined unit costs from the individual departments. The total cost of each item produced is the combined unit costs from the individual departments. Costs are recorded by department according to the following procedures: Costs are recorded by department according to the following procedures: Service department costs are allocated to the production departments. Service department costs are allocated to the production departments. Costs from prior departments are carried over to successive departments. Costs from prior departments are carried over to successive departments. Costs of materials and labor directly identifiable with a department, as well as applied overhead, are charged to that department. Costs of materials and labor directly identifiable with a department, as well as applied overhead, are charged to that department. 10

11. Work in Process Inventories The primary problem in inventory costing is the allocation of total costs between units finished during the period and units still in process at the end of the period. The primary problem in inventory costing is the allocation of total costs between units finished during the period and units still in process at the end of the period. The calculation of the degree of completion of unfinished work in process presents one of the most important and difficult challenges in process costing. The calculation of the degree of completion of unfinished work in process presents one of the most important and difficult challenges in process costing. 11

12. Work in Process Inventories - Stages of Completion 1. Units started in a prior period and completed during the current period. 2. Units started and finished during the current period. 3. Units started during the current period but not finished by the end of the period. 12

13. Allocating Total Cost Total cost must be allocated between: Total cost must be allocated between: Units finished during the period Units finished during the period Units still in process at the end of the period Units still in process at the end of the period Procedures for assigning costs to inventories: Procedures for assigning costs to inventories: Average cost method Average cost method First-in, first-out (FIFO) method First-in, first-out (FIFO) method 13

14. Information Needed for Inventory Valuation Accumulate costs for which the department is accountable. Accumulate costs for which the department is accountable. Calculate the equivalent production for the period. Calculate the equivalent production for the period. Compute the unit cost for the period. Compute the unit cost for the period. Summarize the disposition of the production costs. Summarize the disposition of the production costs. 14

15. Production Report At the end of the period, the department manager submits a report showing the following: At the end of the period, the department manager submits a report showing the following: 1. Number of units in the beginning work in process. 2. Number of units completed. 3. Number of units in the work in process and their estimated stage of completion. 15

16. Cost of Production Summary One Department The reporting of production and related costs in each department involves the following: The reporting of production and related costs in each department involves the following: 1. Accumulating costs for which the department is accountable. 2. Calculating equivalent production for the period. 3. Computing the unit cost for the period. 4. Summarizing the disposition of the production costs. 16

17. Journal Entries for One Department Recording Factory Operations Work in Processxx Materialsxx Work in Processxx Payrollxx Work in Processxx Factory Overheadxx Various Accountsxx Recording Cost of Goods Completed Finished Goodsxx Work in Processxx 17

18. Cost of Production Summary Multiple Departments When there is more than one department, it is necessary to keep separate control accounts in the general ledger for recording the costs of operating each department. When there is more than one department, it is necessary to keep separate control accounts in the general ledger for recording the costs of operating each department. A cost of production summary must be prepared for each department along with separate journal entries to record the operations of each department and the transfer of costs. A cost of production summary must be prepared for each department along with separate journal entries to record the operations of each department and the transfer of costs. 18

19. Cost of Production Summary Multiple Departments (cont.) Costs accumulated in each department are transferred to the next department in the production cycle. Costs accumulated in each department are transferred to the next department in the production cycle. The transferred units and their related costs are treated as completed units in the one department and as raw materials in the next department. The transferred units and their related costs are treated as completed units in the one department and as raw materials in the next department. 19

20. Cost of Production Summary Multiple Departments (cont.) The transferred-in costs and units from the prior department are not included in the calculation of unit cost and equivalent units on the next department’s cost of production summary. The transferred-in costs and units from the prior department are not included in the calculation of unit cost and equivalent units on the next department’s cost of production summary. If there is still another department, the first department’s costs must be considered in transferring cost to the next department. If there is still another department, the first department’s costs must be considered in transferring cost to the next department. The first department’s costs are also considered in the costing of the ending work in process inventory in the second department. The first department’s costs are also considered in the costing of the ending work in process inventory in the second department. 20

21. Journal Entries for Multiple Departments Record Direct Materials Work in Process – Blankingxx Work in Process – Formingxx Work in Process – Finishingxx Factory Overheadxx Materials xx Record Direct Labor Work in Process – Blankingxx Work in Process – Formingxx Work in Process – Finishingxx Factory Overheadxx Payroll xx 21

22. Journal Entries for Multiple Departments (cont.) Record Factory Overhead Work in Process – Blankingxx Work in Process – Formingxx Work in Process – Finishingxx Factory Overhead - Blanking xx Factory Overhead – Forming xx Factory Overhead – Finishing xx Factory Overheadxx Various Accounts xx Factory Overhead – Blankingxx Factory Overhead – Formingxx Factory Overhead – Finishingxx Factory Overhead xx 22

23. Journal Entries for Multiple Departments (cont.) Transfers to Various Departments Work in Process – Formingxx Work in Process – Blanking xx Work in Process – Finishingxx Work in Process – Forming xx Finished Goodsxx Work in Process – Finishing xx BLANKING  FORMING  FINISHING BLANKING  FORMING  FINISHING Department Department Department Department Department Department 23

24. Finished Goods Not Transferred Finished goods in a department may not be transferred until the following period. Finished goods in a department may not be transferred until the following period. These units should be treated as completed and priced out at the full unit price. These units should be treated as completed and priced out at the full unit price. Their costs should be left in the work in process account for financial statement purposes. Their costs should be left in the work in process account for financial statement purposes. 24

25. Change in Prior Department’s Unit Transfer Costs A prior department’s transfers from two different periods will often have different unit costs each month. A prior department’s transfers from two different periods will often have different unit costs each month. The previous department costs must be averaged as a separate grouping so that these transferred-in costs can be properly allocated to the products being produced in the department. The previous department costs must be averaged as a separate grouping so that these transferred-in costs can be properly allocated to the products being produced in the department. 25